'Eurotunnel has £4bn too much debt'

12:01AM BST 12 Jun 2005

The Channel Tunnel company's shareholder meeting this week could precipitate its collapse. Jacques Gounon, the chairman, tells Edward Simpkins that its survival in the long term depends on the banks being prepared to write off billions

The life or death of Eurotunnel will be decided this week. On Friday, the operator of the Channel Tunnel holds its general meeting in Calais. If there is a repeat of the chaotic scenes at last year's event, at which 60,000 largely French small shareholders staged a coup and sacked the largely English board, then the company will almost certainly go bust, owing £6.5bn.

The shareholder activist and demagogue politician who led last year's revolt, Nicholas Miguet, may be facing an investigation by market authorities in France over his activities in the run-up to last year's meeting, but he insists that the revolt will continue.

In a special edition of the Money Programme, "Britains's Biggest Black Hole", to be broadcast on BBC2 on Tuesday at 10.00pm, Miguet tells Jeff Randall, the BBC's business editor, "Once a revolution is under way nothing can stop it. And this revolution is not over yet. In fact, this revolution has only just begun."

But Jacques Gounon, the recently appointed chairman of Eurotunnel, says that Miguet is a busted flush who had his moment last year and claims that there is now a new air of realism among most shareholders. In an interview with The Sunday Telegraph, he predicts that there will not be a repetition of last year's mayhem.

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"I know because I am meeting a lot of shareholders that they have a clear understanding that the game is over and that there is no reason to sack the board," he says.

He claims that shareholders now understand that the future survival of the company hangs by a thread and that only negotiation with the creditors who own Eurotunnel's crushing burden of debt can save it from collapse.

The deadline for debt repayment in January 2007 is fast approaching and an agreement that guarantees a minimum level of income from users of the tunnel is due to expire in October next year. Shareholders recognise that a further bout of blood-letting would be fatal for a company that is so close to running out of time - or, at least, that's what Gounon believes.

"Frankly speaking, I don't think that will happen for the significant reason that shareholders have fully understood that we have no time now to reshuffle the board and have another nine months wasted," he says.

For most of last year, the company was paralysed by the culling of directors. Indeed, the hastily cobbled together board soon fell out over strategy and it wasn't until earlier this year that the company finally sat down to negotiate with its creditors over the way forward.

"I would like to be blunt," Gounon says. "It is not a reproach for the people who were in charge of the company but clearly we lost nine months which could have been used in a very fruitful way to negotiate. So as bankruptcy is clearly scheduled for January 2007, we have only 18 months, which is a very, very short period of time in order to negotiate and find a solution."

However, on Friday Jean-Louis Raymond, the chief executive, undermined Gounon's case that the shareholders' best hope was to stand by the current directors by announcing that he would resign after a board meeting scheduled for tomorrow. The timing of his resignation is damaging as it reveals quite how divided the board has become.

"The chairman of Eurotunnel has publicly criticised Eurotunnel management over the past few weeks for purely political reasons," Raymond says. "The fact that the chairman has chosen to publicly voice his criticism is quite unacceptable, can only be against the company's interests and has forced me to draw my own conclusions."

Gounon says that he regrets Raymond's decision but adds that JLR, as he is known, had done the job he was brought in to do - which was to launch Project Dare, a programme of cost-cutting, revenue improvements and margin improvements.

"I don't want him to step down, I would have been happy for him to have continued and I pay tribute to what he has achieved," Gounon says.

Bad feeling between Gounon and JLR stems from early this year when JLR and Hervé Huas, then the deputy chief executive, put together a recovery plan for the company that contained a debt for equity swap that would have diluted shareholders. The Eurotunnel board, led by Gounon, rejected that plan and Huas resigned as deputy chief executive, though, like JLR, he remained a non-executive director.

Gounon then took personal charge of running the restructuring while JLR took over the operational side of the business. But executives at the company say the two never really hit it off - and on Friday JLR had his revenge.

In these appallingly unstable conditions, Gounon - who needs to have his appointment confirmed at the AGM on Friday - has to tread an incredibly fine line between keeping the hopes of his army of 1.2m shareholders alive, without raising expectations so high that shareholders will refuse to agree any eventual reconstruction deal that they perceive as disadvantageous.

Gounon has been accused by creditors of electioneering and of holding out false hopes to shareholders. They say that by expressing the hope that some of the creditors will be willing to forgive the company billions of pounds of debt, he is being unrealistic - and that by raising that prospect he is making it harder to sell whatever agreement they do eventually agree.

But Gounon says that the collection of banks and vulture funds that now own Eurotunnel's debt are themselves posturing. He says that whatever Eurotunnel does it simply cannot afford to pay off its loans in their current form and that it is reasonable to expect creditors to forgive the company some of its debt.

"For the creditors it will be tough going," he says. "They will discover that Eurotunnel's ability to reimburse loans cannot match very high levels. The result of the studies we have done is that under current conditions Eurotunnel can only support £2.2bn of debt." He also says that rather than actually go bankrupt in a conventional sense, the company will fall into the hands of its creditors in a process called "substitution" - and that the creditors would rather avoid this process.

"Negotiation is the easiest way to find a common solution which would be suitable for both creditors and shareholders," he says. "If creditors enter into a substitution process they will have to convince the governments [of the UK and France]. If we suppose they take over the company they will find the same Eurotunnel as the one I am managing, that will mean the same operational margins, the same profits and the same debt."

He says the advantages to the creditors of taking control are unclear. "I think it is preferable that they negotiate to defend the creditors' interests and I do my job with my team which is improving the performance of the company in order to deliver as much profit as possible," Gounon says.

But some bankers advising other Eurotunnel stakeholders - including the British and French governments - are dismissive of Gounon's aspirations.

"You've got to question the management," one banker close to the company says. "What management has been doing is coming out with a plan that tried not to upset the small shareholders. If you cannot possibly square the circle and you cannot have a solvent company, you should just accept that and have a plan that deals with reality and stop mucking about on specious PR-oriented strategies that cannot possibly work… Instead just get a move on with fixing it: if that is substitution, that is substitution."

If Eurotunnel does end up in the hands of its creditors, it will be an ignominious end for Margaret Thatcher's belief that a huge new public infrastructure project could be a viable commercial concern, paid for entirely by the private sector. As the debate on the financing of Crossrail, a £10bn new railway line to be built in a tunnel beneath London, picks up greater urgency this summer, it is a lesson the Government cannot ignore.

As David Freud, the stockbroker at Warburg who sold a £1bn worth of shares in the original project, admits to the Money Programme, the forecasts in his prospectus bore little relation to reality: "The volumes have simply not materialised, anything like what was expected. Let alone at the prices which were forecast.

"And what happens is that you simply don't have enough money to pay your interest, let alone have profit, let alone pay back the capital." Or to put it another way, if he knew then what he knows now, there would never have been a tunnel under the Channel.